The right level of Sales & Marketing Spend for SaaS Businesses

06/27/2016By Sammy Abdullah, CFA

At DAN Fund we look to public metrics to better evaluate Series A/B startups’ performance. Recently we looked at the Sales & Marketing spend of 47 publicly traded SaaS businesses and drew some interesting conclusions regarding the right amount of spend and efficiency of spend which we believe Series A/B startups should strive to achieve. First the data:

New Rev Per S&M

Revenue

Sales & Marketing

Percentage

Name

Ticker

2015

2014

2013

2015

2014

2013

2015

2014

2013

2015

2014

2U, Inc

TWOU

$150,194

$110,239

$83,127

$82,911

$65,218

$54,103

55%

59%

65%

$0.48

$0.42

Athenahealth, Inc.

ATHN

$924,728

$752,599

$595,003

$229,901

$189,688

$149,488

25%

25%

25%

$0.75

$0.83

Bazaarvoice, Inc.

BV

$191,181

$168,145

$146,812

$78,373

$86,482

$73,114

41%

51%

50%

$0.29

$0.25

Benefitfocus, Inc.

BNFT

$185,143

$137,420

$104,752

$58,589

$48,467

$36,072

32%

35%

34%

$0.81

$0.67

Box, Inc.

BOX

$216,440

$124,192

$58,797

$207,749

$171,188

$99,221

96%

138%

169%

$0.44

$0.38

BroadSoft, Inc.

BSFT

$278,843

$216,857

$178,493

$83,806

$69,471

$56,822

30%

32%

32%

$0.74

$0.55

Castlight Health, Inc.

CSLT

$75,315

$45,605

$12,973

$67,414

$62,065

$33,742

90%

136%

260%

$0.44

$0.53

Cornerstone OnDemand, Inc.

CSOD

$339,651

$263,568

$185,129

$207,026

$162,552

$109,737

61%

62%

59%

$0.37

$0.48

Cvent, Inc.

CVT

$187,716

$142,245

$111,136

$77,931

$61,764

$48,405

42%

43%

44%

$0.58

$0.50

Demandware, Inc.

DWRE

$237,279

$160,553

$106,614

$100,865

$74,432

$52,384

43%

46%

49%

$0.76

$0.72

Five9, Inc.

FIVN

$128,868

$103,102

$84,132

$42,042

$37,445

$28,065

33%

36%

33%

$0.61

$0.51

Fleetmatics Group PLC

FLTX

$284,761

$231,581

$177,350

$96,908

$78,885

$56,589

34%

34%

32%

$0.55

$0.69

Hortonworks, Inc.

HDP

$121,944

$46,048

$10,998

$133,052

$70,695

$17,187

109%

154%

156%

$0.57

$0.50

HubSpot, Inc.

HUBS

$181,943

$115,876

$77,634

$112,629

$78,809

$53,158

62%

68%

68%

$0.59

$0.49

IntraLinks Holdings, Inc.

IL

$276,153

$255,821

$234,496

$124,006

$115,867

$108,428

45%

45%

46%

$0.16

$0.18

Jive Software, Inc.

JIVE

$195,793

$178,693

$145,763

$78,684

$90,141

$86,083

40%

50%

59%

$0.22

$0.37

Lifelock

LOCK

$587,469

$476,016

$369,658

$273,389

$213,984

$162,363

47%

45%

44%

$0.41

$0.50

LinkedIn Corp.

LNKD

$2,990,911

$2,218,767

$1,528,545

$1,048,129

$774,411

$522,100

35%

35%

34%

$0.74

$0.89

LivePerson Inc.

LPSN

$239,012

$209,931

$177,805

$94,728

$83,253

$62,488

40%

40%

35%

$0.31

$0.39

LogMeIN, Inc.

LOGM

$271,600

$221,956

$166,258

$138,946

$119,508

$88,794

51%

54%

53%

$0.36

$0.47

Marin Software, Inc.

MRIN

$108,530

$99,354

$77,315

$45,132

$47,716

$42,799

42%

48%

55%

$0.20

$0.46

Marketo, Inc.

MKTO

$209,869

$149,954

$95,918

$129,072

$98,843

$62,769

62%

66%

65%

$0.46

$0.55

Medidata Solutions, Inc.

MDSO

$392,506

$335,071

$276,849

$103,153

$83,435

$66,337

26%

25%

24%

$0.56

$0.70

MobileIron, Inc.

MOBL

$149,298

$132,295

$105,574

$105,520

$99,870

$68,309

71%

75%

65%

$0.16

$0.27

NetSuite Inc.

N

$741,149

$556,284

$414,508

$388,741

$290,961

$210,079

52%

52%

51%

$0.48

$0.49

New Relic, Inc.

NEWR

$88,589

$52,394

$24,586

$89,162

$58,156

$28,365

101%

111%

115%

$0.41

$0.48

Proofpoint, Inc.

PFPT

$265,397

$195,607

$137,931

$156,156

$102,455

$71,781

59%

52%

52%

$0.45

$0.56

Qualys, Inc.

QLYS

$164,284

$133,579

$107,962

$49,569

$48,049

$42,523

30%

36%

39%

$0.62

$0.53

RealPage, Inc.

RP

$468,520

$404,551

$377,022

$123,108

$111,563

$95,894

26%

28%

25%

$0.52

$0.25

RingCentral, Inc.

RNG

$296,228

$219,887

$160,505

$139,851

$104,827

$72,336

47%

48%

45%

$0.55

$0.57

salesforce.com, Inc.

CRM

$5,373,586

$4,071,003

$3,050,195

$2,757,096

$2,168,132

$1,614,026

51%

53%

53%

$0.47

$0.47

ServiceNow, Inc.

NOW

$1,005,480

$682,563

$424,650

$498,439

$341,119

$195,190

50%

50%

46%

$0.65

$0.76

Splunk, Inc.

SPLK

$450,875

$302,623

$198,944

$344,471

$215,335

$125,098

76%

71%

63%

$0.43

$0.48

SPS Commerce, Inc.

SPSC

$158,518

$127,947

$104,391

$55,374

$46,990

$39,621

35%

37%

38%

$0.55

$0.50

Textura

TXTR

$86,729

$62,968

$47,537

$21,013

$20,518

$16,971

24%

33%

36%

$1.13

$0.75

The Ultimate Software Group, Inc.

ULTI

$618,081

$505,936

$410,397

$169,664

$117,033

$93,879

27%

23%

23%

$0.66

$0.82

Veeva Systems Inc.

VEEV

$313,222

$210,151

$129,548

$56,203

$41,507

$19,490

18%

20%

15%

$1.83

$1.94

Wix.com Ltd.

WIX

$203,518

$141,841

$80,473

$120,010

$97,742

$53,776

59%

69%

67%

$0.51

$0.63

WorkDay, Inc.

WDAY

$787,860

$468,938

$273,657

$315,840

$197,373

$123,440

40%

42%

45%

$1.01

$0.99

Zendesk, Inc.

ZEN

$208,768

$127,049

$72,045

$114,052

$77,875

$37,622

55%

61%

52%

$0.72

$0.71

Secureworks

SCWX

$262,130

$205,830

---

$146,324

$133,878

---

56%

65%

---

$0.38

---

Appfolio, Inc.

APPF

$74,977

$47,671

$26,542

$26,076

$16,876

$10,337

35%

35%

39%

$1.05

$1.25

Atlassian Corporation

TEAM

$319,521

$215,109

$148,512

$67,989

$34,968

$18,795

21%

16%

13%

$1.54

$1.90

Instructure

INST

$73,193

$44,352

$26,055

$53,459

$35,390

$20,702

73%

80%

79%

$0.54

$0.52

Mindbody, Inc

MB

$101,369

$70,010

$48,687

$46,345

$30,922

$20,957

46%

44%

43%

$0.68

$0.69

Shopify

SHOP

$205,233

$105,018

$50,252

$70,374

$45,929

$23,351

34%

44%

46%

$1.42

$1.19

Xactly

XTLY

$61,111

$47,220

$36,325

$28,877

$20,532

$15,410

47%

43%

42%

$0.48

$0.53

Mean

$452,202

$338,179

$249,171

$203,365

$156,220

$110,613

48%

54%

56%

$0.61

$0.64

Median

$216,440

$168,145

$120,342

$103,153

$83,253

$56,706

45%

46%

46%

$0.55

$0.53

-Of the 47 SaaS businesses we note that the median revenue for the past three years was $216mm, $168mm, and $120mm (Salesforce and LinkedIn really skew the averages with their size). The growth rate in 2015 and 2014 was 29% and 40% respectively. These growth rates are for large, lumbering companies that are quite mature, so as a SaaS Series A or B business, you need to be well exceeding annual growth of 29% (70%+ in our view) to command a multiple that’s on par or better than the multiples public companies attract.

-Median Sales & Marketing spend for the past three years was $103mm, $83mm, and $56mm. That’s a growth rate of 24% and 47% respectively so revenue growth has been growing in line with sales spend at the public level. Rising levels of Sales & Marketing spend indicate a healthy but competitive market for SaaS businesses, meaning differentiation is as important as ever.

-For the past three years Sales & Marketing has averaged 45%, 46%, and 46% of revenue, so the typical SaaS company is spending half its revenue on Sales & Marketing. Note the max S&M spend as a percent of revenue is 109% (HortonWorks) and the minimum is 18% (Veeva Systems). As a SaaS business at the Series A/B level, we would argue budgeting at least half of revenue for S&M spend, and so long as the ROI stays attractive, budget even more.

-The most interesting category we looked at was New Revenue Per Dollar of S&M Spend (abbreviated in the table as New Rev Per S&M). Although it’s a rough approximation, we’re attempting to get a sense for S&M spend efficiency so we can answer the question “how much new revenue should our Sales & Marketing spend generate?” The data shows that for each dollar of S&M spend, the 47 SaaS businesses on median generate $0.55 cents of new revenue per year and on average generate $0.61 of new revenue year. Given that this is recurring revenue, those are good returns on S&M spend. Consider that these businesses have net retention of 103% on median (customers upgrades and additions by existing customers outpace customers leaving the business) and gross retention that is generally 80%+, $0.55 of new revenue per year on a dollar of spend should translate into an LTV/CAC of at least 2.50x to 5.50x+. These ratios are strong and indicative of large mature businesses with well-defined sales processes. As a Series A/B company, strive for generating $0.55+ of new revenue for each dollar of S&M spend.

In the comments section, feel free to add any personal observations and your own experiences regarding S&M spend.